ECB: No Policy Change Quite Yet

April 4, 2013

The take-away from today’s statement and press conference is that monetary policy is closer to another rate cut and/or additional unconventional stimulus aimed at enhancing the transmission of monetary policy to troubled peripheral economies.  Several clues were dropped.

  • The inclusion of a plan “in the coming weeks to monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.”  This language was not in the March statement.
  • Expressions of satisfaction that inflation will stay contained.  Expected inflation is firmly anchored, growth risks are skewed to the downside, and “monetary and loan dynamics remain subdued.”
  • A declaration that “it is essential that the fragmentation of euro area credit markets is reduced further and the resilience of banks strengthened where needed.”
  • Signs of some frustration that other central banks may be engaging in competitive depreciations of their currencies.
  • The admission that the second-half 2013 recovery embodied in the ECB’s baseline forecast may not materialize.
  • The assertion of a readiness to act if the economy fails to improve.
  • And a promise to continue with fixed rate tender procedures with full allotment “for as long as necessary.”

The last rate cut by the ECB was made nine months ago in July.  A further cut of the zero deposit rate implies that banks would be charged to park funds at the central bank instead of using such to make loans.  Between February 2012 and February 2013, credit to the private sector fell by 1.2%, and loans to non-financial companies dropped by 2.6%.  CPI inflation of 1.7% in the year to March was the lowest since August 2010.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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